The IRS continues to challenge gifts made on behalf of an individual via powers of attorney where the authority to make gifts is not specifically granted. Consider the case of Estate of Pruitt v. Commissioner (T.C. Memo. 2000-287).

From 1980 to 1992, the decedent, Ms. Pruitt, and her husband began making gifts of their property to their family according to the advice of their estate planner. The couple was worried about the size of their estate and the estate and gift tax liabilities that might arise upon their deaths. They wanted their children and grandchildren to inherit as much of their wealth as possible. During this period Ms. Pruitt made gifts (including mostly personal checks and some transfers of stock) to her three daughters, their husbands, and their children totaling $831,000.

In 1992, Ms. Pruitt executed a durable power of attorney giving her daughter (Ms. Thompson) the authority to "convey, sell, mortgage, pledge, consign, lease and in any other manner deal in and with my property, both real and personal," and "generally to do and perform all and every act which is necessary or desirable to be done in order to properly conduct, manage and control all my business and my property . . .." Ms. Pruitt was mentally sound when she executed the power of attorney, but by December 30, 1993, her Alzheimer’s had progressed to the point where she lacked the capacity to discuss gifts with her daughter.

On December 30, 1993 and on January 18, 1994, Ms. Thompson made gifts of Ms. Pruitt’s real property by separate deeds to each of Ms. Pruitt’s daughters (including Ms. Thompson) and their husbands totaling $111,000. Ms. Pruitt died on February 11, 1994. The estate filed a timely estate tax return reporting a total gross estate of $1,427,908 and adjusted taxable gifts of $252,000. The 1993 and 1994 gifts of real property were not included in the gross estate.

The IRS, pointing out that the power of attorney executed by Ms. Pruitt did not "expressly authorize the attorney in fact to make gifts," determined that the 1993 and 1994 gifts were includable in the gross estate.

The Tax Court, however, disagreed with the IRS and ruled that the power of attorney was "sufficiently broad to encompass the power to make gifts." The legal effect of gifts made pursuant to a power of attorney is determined according to State law. Some states have prohibited gifts by attorneys-in-fact if that power is not specifically granted in the power of attorney. But even in states where no such rule exists, specifying the power to make gifts could avoid a court battle.